Are CDS Spreads Sensitive to the Term Structure of the Yield Curve? A Sector-Wise Analysis under Various Market Conditions

Asiya Sohail

Abstract:

This study examines the impact of changes in the yield curve factors on the Credit Default Swap (CDS) spreads of the U.S. industrial sectors. Stock returns and the crude oil-based volatility index are used in a quantile regression framework to test the validity of Merton’s model. The results suggest that the long-term factor of the yield curve is a negatively significant determinant of the CDS premia regardless of the sector and market state. The CDS spread of the financial sector exhibits sensitivity to the short-term factor of the yield rate in extreme market states. Basic materials, oil and gas and the utilities sector are responsive to variations in the medium-term factor of the yield rate in upmarket conditions. The empirical findings also suggest a significant inverse relationship between CDS spreads and stock returns.

research from:

• Foundation University - Faculty of Management Sciences

Year:

2019

Type of Publication:

Article

Journal:

Journal of Risk and Financial Management

Volume:

12

Number:

4

Pages:

158

Month:

9

DOI:

doi:10.3390/jrfm12040158